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Estimation of a nonseparable heterogenous demand function with shape restrictions and Berkson errors

Author

Listed:
  • Richard Blundell

    (Institute for Fiscal Studies and University College London)

  • Joel L. Horowitz

    (Institute for Fiscal Studies and Northwestern University)

  • Matthias Parey

    (Institute for Fiscal Studies and University of Surrey)

Abstract

Berkson errors are commonplace in empirical microeconomics and occur whenever we observe an average in a specified group rather than the true individual value. In consumer demand this form of measurement error is present because the price an individual pays is often measured by the average price paid by individuals in a specified group (e.g., a county). We show the importance of such measurement errors for the estimation of demand in a setting with nonseparable unobserved heterogeneity. We develop a consistent estimator using external information on the true distribution of prices. Examining the demand for gasoline in the U.S., accounting for Berkson errors is found to be quantitatively important for estimating price effects and for welfare calculations. Imposing the Slutsky shape constraint greatly reduces the sensitivity to Berkson errors.

Suggested Citation

  • Richard Blundell & Joel L. Horowitz & Matthias Parey, 2018. "Estimation of a nonseparable heterogenous demand function with shape restrictions and Berkson errors," CeMMAP working papers CWP67/18, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:cemmap:67/18
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    References listed on IDEAS

    as
    1. Susanne M. Schennach, 2013. "Regressions with Berkson errors in covariates - A nonparametric approach," Papers 1308.2836, arXiv.org.
    2. Richard Blundell & Joel Horowitz & Matthias Parey, 2017. "Nonparametric Estimation of a Nonseparable Demand Function under the Slutsky Inequality Restriction," The Review of Economics and Statistics, MIT Press, vol. 99(2), pages 291-304, May.
    3. Blundell,Richard & Newey,Whitney K. & Persson,Torsten (ed.), 2007. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521871532, January.
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    6. Richard Blundell & Joel L. Horowitz & Matthias Parey, 2012. "Measuring the price responsiveness of gasoline demand: Economic shape restrictions and nonparametric demand estimation," Quantitative Economics, Econometric Society, vol. 3(1), pages 29-51, March.
    7. Jerry A. Hausman & Whitney K. Newey, 2017. "Nonparametric Welfare Analysis," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 521-546, September.
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    9. Blundell,Richard & Newey,Whitney & Persson,Torsten (ed.), 2007. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521871549, January.
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